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Africa and Global Competitiveness: The neglected perspective

By Jekwu Ikeme

May I start by thanking the Publisher and Staff of Vanguard Newspapers for

providing the opportunity for the reappraisal of the Africa economic

crisis through their 15th Anniversary Lecture. One could not help being

once again overwhelmed by the heartrending account of the economic burden

hanging on the neck of the richly endowed continent. If Dr. Kwesi Botchwey's

statistic-laden and insightful account was an eye-opener, then Dele Sobowale's

complementary article by the above title was a rude jolt back to our

self-inflicted woes. While Dr. Botchwey's treatise identified high factor

cost, poor infrastructure and high tariff as the reasons behind declining

economic performance of African nation states and suggests the adoption of

neo-liberal policy as solution, Sobowale dwelt on the corruption that has

for ages remained the plague of African leaders and holds that, the major

stumbling block for the enhancement of Africa's position in the global

competition scheme. I then pose the question: if all African leaders were

to be honest and committed and had consequently mobilized all the

resources at the disposal of their respective nations for addressing our

collective economic goals, would that place Africa in a position to

effectively compete with their counterparts in the developed nations? The

answer is still capital NO! Unless African nations recognize their primary

dependence on natural resources for income generation (and as such treat

them as a capital stock), modify the present unsuitable system of National

income accounting and the necessary adjustments made to the global trade

system, a resolution of the issues raised by both Botchwey and Sobowale is

not sufficient to place Africa in the right position of global

competitiveness. Much of what follows is an exposition of arguments to

buttress this position. Also, as rightly noted by Sobowale, what we need

at this juncture is more of solutions, and less of statistics - the

poverty that stares us in the face is enough statistic to tell us where we

are. This treatise will equally attempt to proffer a possible path for

resolving the economic subservience of African nation states.

 

For the purpose of understanding the foundation for the suggestions made

in this essay, two important points must be clarified. One, the objective

of national income account, and two, the relationship between African

economies and natural resources. The objective of the national income is

to provide an information framework suitable for analyzing the economic

performance of nation states. Central to this concept is the definition of

what is actually meant by income. The Hickson notion of income (or

sustainable income) is those receipts (or rents) that are not derived at

the expense of declining capital, or the maximum value that can be

consumed whilst remaining as well off at the end of the period as at the

beginning. This implies that those receipts that accrue, as a consequence

of the depletion of capital should not be deemed income. For a receipt to

be deemed an income, it must have been obtained while all forms of capital

stocks are left intact. For the purpose of the arguments proffered here,

it is important that we first identify that the three forms of capital

available to a nation for generating income and wealth are man-made

capital, natural capital and human capital. The last two forms of capital

are not recognized in income accounting. Underlying this accounting

anomaly is:

 

(i) The implicit and erroneous assumption that natural resources are so

abundant that they have no marginal value and that natural resources are

free gifts of nature, so that there are no investment costs to be written

off. As this essay will later show, this assumption is the bane of

Africa's economic health.

 

(ii) The assumption that depreciation does not apply to human capital

(knowledge and skills) and as such can always be passed on from generation

to another. This, however, is not true, human capital depreciation does

occur and this is expressed in the loss of indigenous skills and knowledge

(through displacement of tribes, loss of ancient crafts, culture,

language, etc.) as is going on all over Africa even at this moment. A

further case is the classical case of underdeveloped human capital; in

terms of education, technical know-how, etc . This is at the root of the

call for investment in human capital as a necessary precondition for

development. However, for the sheer purpose of simplicity and avoidance of

the inherent difficulty in the monetisation of human capital for national

income accounting, the analysis here will ignore human capital and dwell

more on natural resources.

 

The next important point for the analysis to be made here is the fact that

most African nations mainly depend on one form of natural resource or the

other for their foreign exchange earnings. Statistics from the World Bank

says that agriculture alone accounts for 33% of Africa's GDP, 66% of its

labour force, and 40% of its exports. This is just agriculture, Mining and

other extractive industries are not included. This dependence on natural

resources was not by choice. As rightly pointed out by Cheru (1992), food

shortages, poverty and high levels of indebtedness in Africa are part of a

larger historical phenomenon. After the partition of Africa in 1884, the

western European powers established the rules by which Africa would

participate in the world economy. Simply, Africa was to produce raw

materials and agricultural goods to meet the needs of Europe's industries

and consumers. Thus, Kenya would plant coffee and tropical fruit, Sudan

would grow the cotton needed in Manchester, Ivory Coast would grow Bananas

and Pineapple, Ghana would produce Cocoa and Senegal groundnuts needed to

make margarine. A luxury beverage and cocktail economy was thus created.

This pattern of commodity dependence has changed very little since the era

of independence. Having these two points at the back of our minds, let us

now proceed to analyze the opportunities (or misfortune) of African

nations in the global economic competitiveness as we approach the new

millenium.

 

Firstly, let's look at the system of national income accounting. Economic

indicators such as GNP and NNP, operating on the assumptions outlined

above, fail to reflect the depreciation in natural assets. NNP is an

improvement over GNP measure in that man-made assets are valued as part of

the productive capital and, as such, are written off against the value of

production as they depreciate. This practice recognizes that a consumption

level maintained by drawing down the stock of tangible capital exceeds the

sustainable level of income. Thus, while NNP may remain relevant for

measuring the economic performance of developed economies - where man-made

assets have long replaced the natural resource capital, it is certainly

not suitable for measuring economic performance of African nation states.

This is because natural assets are not so valued, and their loss entails

no debit charge against current income that would account for the decrease

in potential future production

 

Depreciation in natural assets takes two main forms - environmental

degradation or natural resource depletion. I will not bore you with the

complicated methodology proffered by environmental economists for

calculating and internalizing such depreciation. An understanding of how

natural capital depreciation come about will suffice for the purpose of

the present discourse. Environmental degradation is the loss of

environmental quality associated with production of goods and services.

This takes the form of air pollution, water pollution, land pollution,

etc. Have we asked ourselves why the prices of goods imported from

developed nations always exceed that of our exports by outrageous margins?

One may quickly proffer an argument to the effect that it is the

value-added nature of goods from developed economies that entails their

higher cost and hence the consequent debt that arises in the national

balance sheet of poor nations. While that is one undeniable factor, the

second often-ignored factor is the difference in the level of

environmental regulations between developed and developing nations.

Environmental degradation by western industries are heavily taxed in order

to offset (even if only partially) the externality cost they inject into

the economy and the cost of these taxes are reflected in the international

prices of the goods manufactured by these industries for export. The

international prices of similar exports from African nations do not

reflect the externality costs generated by the production process given

the prevailing low environmental standards. For instance, Food and

Agricultural Organization (FAO) reports that the average unit export price

of wood products appears to be about 20% less in developing countries than

in developed countries.

 

The implication of this is that earnings from these natural

asset-degrading productions are often below costs and even if adequate

re-investment were to be made, economic loss remains the net result. So

Zaire cuts its forests and exports the produced timber to Europe at a

price determined by the international price regime. The removed forest

cover exposes the soil and erosion occurs, leading to; loss of arable

land; siltation in the streams and rivers that reduces water quality,

entailing extra costs for those who depend on the land and water

resources. These extra costs are not factored into the international

timber price system and as such the receipts for the timber remains lower

than the economic consequence of the timber exports. Likewise, Nigeria

export oil and in the process pollutes its waters and land, removes forest

cover, deprives the Ogonis and other delta tribes of their source of

livelihood. The cost of prospecting, extraction, production and

transportation of the exported oil is considered the cost of production

and the excess over that deemed the profit. The externality cost incurred

by the nation in oil pollution, deforestation, lost livelihood and the

rest are hidden and consequently, not factored into the international

price of oil.

 

The same kind of analogy goes for the industrial technology dumping which

Africa has remained at the receiving end all these years. Multi-nationals

are systematically transferring the production end of their businesses to

poor nations including African nations where environmental services can be

obtained at little or no costs, given the higher regulation and taxes in

the developed nations. The emissions from such industries pollute the

waters of the poor nations causing; loss of livelihood for fishermen and

farmers; ill health for the general populace decreasing life expectancy of

the citizens of such poor nations and consequently entailing extra health

costs for the poor nations. These health and economic costs are not

recognized in the prices of export goods manufactured from such

pollution-intensive activities. Conversely, in developed nations, such

externalities are captured through adequate taxes and the proceeds used

for (i) funding free health care, (ii) research and development in

industry-related technologies (iii) compensation of victims of

economic-related pollution, etc. Thus African nations import value-added

products from the developed world at relatively environmental

cost-embodied prices and sell off their own products at a price less than

the true cost. Under such a lopsided trade structure, how can African

nations ever become truly competitive in the global economic arena?

 

Natural resource depletion, on the other hand, is associated with the

extraction and consumption of natural capital such as gold, oil, timber,

coal, columbite, etc. African nations are most susceptible to this sort of

natural capital depreciation because of the aforementioned dependence on

natural resources for employment, foreign exchange and general livelihood.

Developed nations deal more with value-added goods and NNP captures much

of the depreciation in the man-made capital needed for the manufacture of

such export goods. On failing to recognize that natural assets are

depreciable, the same NNP gives a wrong indication of economic performance

of African nation states. This offers an explanation to the observation

that most countries now heavily burdened with debt are the

natural-resource dependent nations

 

It is this difference in treatment of natural resources and other tangible

assets in income accounting that provides false signals to African policy

makers, blinding them from the need for corresponding re-investment of the

rent from capital consumption. It reinforces the false dichotomy between

economy and the environment that leads policy makers to ignore or destroy

the later in the name of economic growth. Thus it promotes and seems to

validate the idea that rapid rates of increasing consumption levels can be

achieved and sustained by exploiting and destroying the natural resource

base. Ward (1992) presents a sad exemplary tale of Kiribati, the small

republic of the Solomon Islands, which depended throughout the 20th

century on its phosphate mines for income and government revenues. While

the mines ran, GDP was high and rising, but the mining proceeds were

treated as current income rather than as capital consumption. When the

deposits were mined out in the 1970s, income and government revenues

declined drastically because far too little had been set aside for

investment in other assets that replace the lost revenues. The analogy

above immediately explains the regression in Africa's share of world trade

as Dr. Botchwey's statistic showed.

 

Just ponder on this, an economy exhaust its mineral resources, cut down

all its trees, erode its soils, deprive rural dwellers of their source of

livelihood (leading to high unemployment), allow air pollution to

accumulate causing increased ill-health for the citizens, etc., but its

measured income would not reflect these capital and economic losses. These

observations sound so simple and basic that one may dismiss it with a wave

of the hand. However, taking this "obvious" insight seriously leads to

some profound conclusions. The implication is that for almost every trade

transaction an African nation makes with a developed nation, a portion of

her ecological carrying capacity (or call it competitiveness) is traded

away at a grossly marginal value. Whither our competitiveness under such a

system? Even more dismal is the result of sustainable income calculations

for some African nations. Calculations for Nigeria, Mali, Burkina Faso,

Ethiopia, Cameroon and Malawi by independent environmental economists

using obviously understated natural resource depreciation figures show

that these economies are enjoying unsustainable national income levels.

Therein lies the danger in the current income accounting model for African

nations.

 

Secondly, the global trade system is biased against natural

resource-dependent economies and its structure ensures that third world

countries have a growing comparative advantage in resource intensive

exports. Developed countries, especially the three largest trading areas

of North America, the European community, and Japan, impose tariff systems

that favor resource-intensive goods, using their high purchasing power as

a blackmailing rod that whips every other economy in line with their

wishes.

 

Reinforcing the contribution of this bias to the impoverishment of African

nation states is government policy failure. Governments in developing

countries - obviously responding to the tariff system in the wealthy

nations - often intervene in agricultural markets to enhance the volume of

exports. The usual strategy is to keep domestic food prices low, while

providing incentives for cash crop production through subsidized interest

rate credits, tax holidays, free provision of infrastructure, and land

concessions. Such policies tend to reduce agricultural incomes among small

farmers and thus their funds to invest in conservation measures. Other

agricultural extension policies are largely oriented toward improving

export crop production on large farms rather than enhancing income on

smaller mixed farming systems. These interventions have tended to penalize

smaller producers, while providing incentives for additional land clearing

by small and large rural property owners alike. The resulting

impoverishment leads to excess population growth, as poor families feel

obliged to have many children to provide household help and old age

support. The resultant rapid population growth increases reliance on

natural resources for household food and energy, thus perpetuating the

trend towards environmental degradation, resource depletion and greater

poverty. A vicious cycle made in hell. Why should per capita income not

decline when population continues to grow, forcing more people to continue

over-cultivating marginal lands for food, energy and to eke out a living?

 

Some case studies will even illustrate the above points further.

Rosenblum and Williamson (1987) reports the disastrous effect of emphasis

on beef exports on the land resources of Bostwana. Driven by the quest for

foreign exchange, the government of Bostwana ignored the limited nature of

the carrying capacity of their land, relative to large numbers of cattle

and sheep, given the fragile nature of their soil and the lack of water.

In 1989, there were 2.5 million cattle, 1.8 million goats and 290, 000

sheep. About 110 ranchers together own as many cattle as 29, 000 small

farmers. In the early 1980s, the World Bank poured an estimated $10

million into cattle projects in Botswana disregarding the country's

environmental reality. Beef processing accounts for 80% of agricultural

output in Botswana and over 95% of production is expected. Since Botswana

enjoys preferential access to the European Economic Community (EEC) market

under the provisions of the Lome conventions, 90% of its beef exports is

exempt from import levies. This emphasis on beef export has accelerated

the rate of land degradation and has increased stratification in Botswana.

These degrading effect of the beef exports is of course not recognised in

the international price system and soon the threshold of the land

resilience will be reached resulting in poor quality grass for animal

feed, animals will start dying and the whole economy will come crashing.

EEC will simply look elsewhere for its beef import and another economist

will sing a requiem of statistics, but the problem persists.

 

Cote d'Ivoire, once considered as one of the "success stories" of

capitalism in Africa, is presently undergoing a severe economic and

ecological crisis. Its economic miracle was largely based on agricultural

conversion of forestland for the planting of cocoa, coffee, and export of

commercial timber. With the slump in world coomodity markets, the

country's balance-of-payments position deteriorated sharply. The

productivity of agriculture also declined due to the degradation of

vegetation cover. Timberlake (1985) reports that the severity of the

country's deforestation has led to a dramatic reduction of the

availability of timber for export.

 

In all such cases as above, the cost of ecological destruction and the

high level of debt incurred in the process are left behind to be borne by

residents of the respective areas who have no political recourse. In

Northern Nigeria, for example, the World Bank-funded Talak-Mafara

irrigation project near the Sokoto River resulted in the displacement of

60, 000 peasants in a three-year period. In Ethiopia, the donor funded

Awash Valley Development Authority irrigation projects, involving sugar

and cotton production, resulted in the eviction of thousands of nomadic

Afars from their traditional pasturelands in the Awash Valley. If and when

people organise against projects that would result in ecological

destruction and in the process destroy their livelihoods, they are often

labeled by governments as obstructionists and anti-progress. Dr Wangari

Maathai of Green Belt Movement and Ken Saro-Wiwa of MOSOP quickly come to

mind. Yet you ask why we are poor.

 

Emerging from the above analysis is the fact that even if the Mobutus,

Abachas, and Babangidas of Africa were to be honest leaders genuinely

committed to the re-investment of scarcity rents from natural resource

earnings, most African nations will still be running a deficit, since

natural capital consumption remains unrecognised. Except the issues above

are adequately addressed, Africa will economically remain on the trail of

the developed nations.

 

I suggest that all natural resource-dependent nations should form a

transnational economic coalition. The coalition will serve the purpose of

calculating and internalizing the externality costs of natural resource

exports and stipulating minimum prices for their export. What I advocate

here goes beyond regional integration as advocated by Chief Shonekan in

the same lecture - that is admittedly quite necessary. But we need a more

encompassing economic co-operation with nations of similar plight in Asia,

South America, and wherever else they are, in order to form a formidable

economic bloc. Call it an economic cartel or what you may, but the fact

remains that the whole developed economies have been operating like a

cartel all these years in their unanimous transfer of poor technology

industries to African nations; erection of tariff structures that exploit

Africa's natural resource bases; etc.

 

The next important issue is the raising of environmental standards in

African nations. New industries from western nations and old ones already

operating should be made to operate at the same standard with their

counterparts in the western nations. Appropriate tax and other economic

incentives, institutional measures for monitoring, and penalties should be

put in place to ensure compliance. Funds from such taxes should be

invested in activities that will benefit the advancement of natural and

human capitals, such as education, other wealth-creating ventures,

research and development, employment, healthcare, compensation schemes,

etc. Finally, participatory and democratic decision making is urgently

needed for the improvement of social welfare in Africa. People are

impoverished, deprived of their rights and source of livelihood simply

because they are not part of the decision making. The aim of a nation's

economic activities is to better the lot of its citizens. If in the

process of maximising foreign exchange earnings, a nation visits greater

impoverishment and harm on its own people, then the aim of the foreign

exchange earning would have been defeated. This is because, the income so

earned will have to go back into redressing the anomaly it has injected;

i.e. poverty alleviation, healthcare, etc. leading to an economic exercise

in futility.

 

What I have tried to do is to use some practical illustrations to show

that while neo-liberal policies, abolition of corruption and rent-seeking

of any sort are desirable, they are not sufficient to place Africa in the

right position of global competitiveness. What is urgently needed is for

African nations to (i) recognise their dependence on natural resources and

as such treat them as part of their capital stocks (ii) internalise the

externalities in the economy (iii) restructure the income accounting model

and (iv) enter into the sort of economic alliance that will make all the

above feasible. Only by so doing will our economic ill health begin to see

salvation.

 

Jekwu Ikeme

Environmental Change Unit,

University of Oxford

United Kingdom

 

4th May 1999

 

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Copyright Africa Economic Analysis 2005